THE EURO touched its lowest level against the dollar in more than four years yesterday on concerns that European measures to reduce fiscal deficits will undermine the 16-nation currency region’s recovery.
However, the single currency stabilised somewhat after the European Central Bank (ECB) announced measures to soak up money injected into financial markets with its purchase of government debt.
The euro fell as much as 1 per cent to $1.2235, the lowest level since April 2006, before firming up after the ECB announcement.
It has fallen about 6 per cent over the last week, and almost 20 per cent since last December.
“After the EU rescue package last Monday [May 10th] there was an initial relief rally,” said John Moclaire of Bank of Ireland Global Markets. “Since then markets began to worry [that it] was just a short-term fix, and that the underlying structural problems hadn’t been fixed.”
Luxembourg’s prime minister Jean-Claude Juncker said yesterday that the pace of the euro’s decline was more worrying than the level to which it had fallen.
“I’m not worried about the current exchange rate, but more worried about the rapid deterioration of the exchange rate,” Mr Juncker told reporters. “We will intensively watch developments on the foreign exchange market.”
He said financial markets “will not force us to our knees”.
The ECB said it would invite banks to deposit cash with it for one week to absorb the €16.5 billion of bond purchases settled up to May 14th. “The ECB is saying, ‘Whatever you think we’ve been doing, it’s not quantitative easing’,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.
“People were selling the euro on the prospect of quantitative easing, so when you reverse that it’s positive for the euro.”
John Beggs, chief economist with AIB Global Treasury, said the main problem for the euro was the lack of confidence in the economic policy management of the euro zone, particularly in relation to those countries with very large budget deficits.
He said the euro was losing against the dollar because the US economy seemed to be picking up faster than the euro area, but the main reason was the uncertainty created by Europe’s fiscal problems.
However, he described the weakening of the euro as more of a “downward drift” than a collapse, and said he expected the rate of decline would now slow, although the currency was likely to remain under pressure for a number of months.
Mr Moclaire said the markets were waiting to see whether Europe could deliver a coherent, unified response to its fiscal problems. The market’s view seemed to be that the approach so far had been somewhat disjointed.
Another Dublin-based currency expert pointed out that the euro was set at $1.17 to the dollar when it was launched in 1999, and in the interim has fallen to a low of 82 cent.
“Clearly the fall has been pretty sharp in the last few months by any historical standards . . . but the absolute level is not overly weak,” Mr Moclaire said. – (Additional reporting: Bloomberg)
